If you’ve ever applied for a home loan, auto loan, or even a cell phone contract, you’ll know that credit scores matter.
They play an important role in obtaining loans, and the interest rate of these loans will. But does a low credit score affect your insurance premium? And if you don’t honor your insurance, does it affect your credit score?
The short answer to both questions is “yes,” said Wynand van Vuuren, customer experience partner at King Price Insurance. Not paying insurance premiums can affect your credit score, while conversely, a low credit score could cause you to pay more for insurance.
Your credit score is a three-digit number that helps lenders assess how safe or risky you are as a customer. It’s based on information in your credit report, which is a history of all the loans and credits you’ve ever taken out, and how you’ve repaid them, as well as your reliability with your other monthly payments, Van Vuuren said. .
How Your Credit Score Affects Your Insurance Premium
When you apply for insurance, insurers use a range of factors to assess your risk, which ultimately determines the monthly premium you’ll pay, King Price Insurance said.
For a car, an insurer will typically look at the age, make and model of the car; your age and driving history; the security measures in the premises where you most often park your car; your accident and claims history; and your credit score.
“Your credit score is a powerful predictor of your financial behavior. It tells lenders and financial institutions how likely you are to pay your bills and default on your debts. Combined with other factors, this helps paint a picture for an insurer of the risk you would be taking on as a client. And yes, that risk will be reflected in your premium,” Van Vuuren said.
How Not Paying Your Insurance Affects Your Credit Score
For many South Africans, times are tough right now. TransUnion’s Q4 2021 Consumer Pulse study shows that more than half (55%) of households are still feeling the effects of the pandemic on their finances. Of those affected households, more than eight in 10 (85%) remain “very concerned” about their ability to pay their current bills and loans.
But not paying your insurance premiums won’t just put you in financial trouble if something valuable is damaged or stolen. It may also affect your ability to get insurance, or any form of credit, in the future, as your credit score will be affected, King Price Insurance said.
“If a debit order fails, it’s recorded with the credit bureaus as a missed payment and can impact your score – making it harder to get credit in the future, not to mention insurance” , Van Vuuren said.
And if your finances are so tight that you’re thinking about canceling your insurance altogether, think again. “It is extremely risky to cancel your insurance, because it is in times of crisis that you need insurance the most. Speak to your insurer now and make a short-term plan, rather than suffer long-term consequences,” Van Vuuren said.
Meaning of credit score
Your credit score and other factors affect whether you get credit, how much you can borrow, and most importantly, how high your interest rate is, said Ester Ochse, product manager: FNB Money Management .
“A credit score is basically a report card of how you manage the credit given to you by various financial institutions and retailers. Products like credit cards, personal loans, home loans, and retail store cards are some examples of the forms of credit one can receive from financial institutions.
“Your credit status is usually displayed as a number on various credit bureaus, and the higher the number, the better you’ve managed your current and past credit,” Ochse said.
This score tells financial institutions the level of risk they will take if they extend credit to you. The better your credit score, the more likely you are to receive credit and potentially at a better interest rate, Ochse said. The lower your credit score, the less likely you are to get credit, and if you do, the rate will be higher.
Here are the factors that have a negative impact on a credit score:
- Being behind on monthly payments
- Missing monthly payments
- Ask for credit frequently
- Have steadily increasing credit usage
- Have a judgment against you
- be declared bankrupt
There are a few steps you can take to avoid having a negative impact on your credit score, Ochse said. “Align your debit order dates as close to your pay date as possible. This way you know they will get paid and you don’t have to worry about it. Have an emergency fund in place for unforeseen events and expenses; this way you don’t need to rely on credit.
Set and stick to a budget. Check your score regularly to make sure you’re on track and spending money on important things.
Read: South Africa heading for big interest rate changes – what you need to know